Wikinvest Wire
Wednesday, March 11, 2009
Let The Sun Shine!
Not much can capture the joy of a 6% rally like the Aquarius song from closing credits from the 40 Year Old Virgin. Thank goodness the bear is over, the financial crisis is over and we can buy them with both hands (that was sarcastic).
As has been mentioned many times the biggest up days occur in bear markets not bull markets. That does not preclude bear market rallies of all sizes from happening. At the beginning of the year I opined that we had a very good shot of a very big bear market rally and while the timing of that was wrong, big rallies, sometimes huge rallies, are part and parcel of bear markets (see 1932 and 1933).
The decline in the stock market from the 2007 peak has been incredibly fast and incredibly severe. While I have no idea whether yesterday will be the start of something really big or a one day wonder I do believe we will have a huge rally at some point that makes people start to feel good again followed by another big decline that scares the hell out the same people who felt good on the way up.
Forget the emotion, look at a Stock Trader's Almanac (or the max DJIA chart on Yahoo Finance) to see the extent to which feel good rallies followed by more tears repeats in every cycle including the Great Depression (repeated for emphasis). For those worried that this is the great depression 2.0 keep in mind a huge sucker's rally has nothing to do with fundamentals, they are short-ish term events driven by emotion.
Instead of more tears if things play out the way I think (up a lot followed by another big run down) it makes sense to remember how these things often work so you won't be surprised in case the next great bull market is not upon us. Some folks might want to think about reducing their equity exposure after a big run up either for tactical reasons or for the I-give-up reasons cited yesterday.
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9 comments:
Morning, Roger. Bespoke had an interesting graph up yesterday showing that the S&P would need to rally 48% to get back to the 200 dma. I guess the gap could narrow naturally with some sideways market action, but it seems likely to be a very extended period before demand is healthy again.
Does the fact that the gap is pushing historical boundaries influence your thinking any about when to become less defensive?
Thanks very much.
You had me worried there for a second in your first paragraph lol.
Good topic though. Several of my friends had asked my thoughts on yesterday. I thought I sensed a bit of hope that I would give them the good news they were seeking.
This was nothing more then buyers and bulls desperate for action after having been bored on the sidelines and wanting to react to any good news. As soon as the next bad news comes out (perhaps Thursday with Feb. retail sales?)everyone will remember whats going on.
Anon 5:43 thats a good thought and Roger I am interested too. You talk about the 200DMA for when to get defensive. 48% is a long way and it would seem to me that a strong reversal would be visible before then. What are your thoughts on when things truly have reversed.
Stocks go up and down. Stocks mostly go up. Yesterday stocks were up. Adios.
the 200 DMA is sloped downwards and will continue lower and then sort of gap lower when last October becomes the back end of of the 200 day period so the huge percent needed to get back will get much smaller.
Yeah, I'll put the 'massive bear market rally' thoughts in with 'normal bear market' - there has been neither of those, so far. If we finally bottom after such a large decline won't it be pretty usual to start climbing the wall of worry, rather than trying to pole vault it?
We've dropped so far, what you're saying is that investing in stocks from 2007-2020 will be a bad idea when looking back from 2020.
Roger, with the dollar topping (perhaps), how are you managing the cash portion of the portfolio? Currency ETFs/gold? You mentioned some new Wisdom Tree ETFs back in 1/08, curious if you have looked into it since.
I did more with currencies ETF in 2006 and 2007 but have had currency exposure lately with short term sovereign debt from Norway for most clients and then Australia for some clients.
This is my wildly speculative forecast of where the S&P 500 is going: 700, 750, 600, 900, 450.
I will counter the S&P projection with mine. 721 710 732 725 722
In other words low and flat no action till 3Q or may be 4Q earnings ring up.
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